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Connections with Leading Thinkers – Carlos Arruda

Armen Ovanessoff and Eduardo Plastino of the Accenture Institute for High Performance interview Carlos Arruda as part of a research project on collaborative innovation.

As part of the Accenture Institute for High Performance's mission to develop cutting-edge new ideas and insights, researchers often seek the views of academic leaders, business executives and industry analysts. The Connections with Leading Thinkers series captures some of those interviews, showcasing interactions and discussions with some of the world's leading experts.

Academic Carlos Arruda discusses the problems that must be surmounted to boost innovation in Brazil’s economy.

Carlos Arruda is a professor of Innovation and Competitiveness and the Director of the Innovation Center at Fundação Dom Cabral (FDC), a business school. He is also FDC’s Associated Dean for Business Partnership. Eduardo Plastino of the Accenture Institute for High Performance interviewed him as part of a research project on innovation in the Brazilian economy.

What explains Brazil’s poor performance in innovation compared to other countries?

A key point is that the business environment is not conducive to it. For example, compare the seven to ten years it may take to obtain a patent in Brazil with the few months that it takes in Switzerland or the US. You also have other issues that affect the entire economy, such as our heavy tax burden and poor education levels.

And yet there are some very innovative companies in Brazil.

Yes, but many import foreign innovation and maybe customize it to a minimal degree. In fact, even multinational companies that have built R&D centers here often do not count Brazil among their main global sources of innovation.

What role does academia play in Brazilian innovation ecosystems?

Brazilian universities, especially public universities, generate a good deal of relevant research. But such research seldom translates into technology and innovation. This is because of a perception that, since university-generated knowledge depends on public resources, it shouldn’t be transferred to the private sector without proper financial compensation. So when it comes to transferring university-generated technology to the private sector, which happens only occasionally anyway, the transfer tends to be to large companies.

Is this a problem?

In places such as the US and Israel, licenses to use university-generated knowledge mostly go to start-ups. Then start-ups build bridges to large companies. In Brazil, we have a different situation: universities don’t seek to generate companies; they seek to educate people and generate research for publication. Fortunately, this seems to be changing. Moreover, there is pro-entrepreneurship momentum in the country.
But historically, we have a framework in which the government invests in universities and research centers and transfers resources to large companies through the National Development Bank (BNDES) and through particular pieces of legislation. The problem is that we miss that intermediary element: the start-up. This issue in our ecosystem needs to be addressed if our economy is to become more innovative.

Why do large companies depend on start-ups to transform university generated knowledge into innovation?

Collaboration between large companies and universities isn’t natural anywhere. Ultimately, large companies seek knowledge they can scale up. Universities generate knowledge that may have this potential, but you need start-ups to serve as the risk-taking little gears that will turn between academia and large corporations to make this innovation engine work.

How is the bridge between startups and large companies built?

There are alternatives. Corporate venture capital is often a successful route. For example, Intel invests in smaller companies in Brazil (and other countries) rather than
absorbing them. Unfortunately, we have few additional similar examples here.

How could corporate venture capital be encouraged in Brazil?

It would probably involve changing some fundamental aspects of our economy. The reality is that, despite increasing interest in innovation, Brazilian companies remain
timid in their investment behavior. Most innovation investment comes from the government. But we can’t blame companies when there is so much uncertainty in the short term. Moreover, interest rates are high, so fixed income investment can give you a return of around 6 percent a year on top of inflation. When you add the high tax burden and high operational costs facing companies in Brazil, you understand why businesses are timid in their innovation investment. As a result, whatever innovation we produce tends to be incremental rather than disruptive.

Why don’t large and small companies collaborate more to pursue innovation in Brazil?

Part of the problem is lack of knowledge in large companies. They see small firms simply as suppliers, not as potential innovation partners. Most don’t realize that a small firm can use the knowledge held by a big company and come up with an innovative solution. It’s just not in their mental framework.

What about the role of small companies? Do they try to work together with large corporations in the realm of innovation?

Not really. Small companies here, especially (though not exclusively) in manufacturing supply chains, focus on producing what their clients demand. They receive specific requests and work to meet them.

Do concerns related to the protection of intellectual property also undermine collaboration between large and small companies?

For large companies, this is almost a secondary consideration—not least because, as I said, they see small firms as low-cost suppliers. But for small entrepreneurs, IP protection is a big deal. They know the protection system in Brazil is relatively weak, so when they show something to large companies, they fear their idea may be stolen. This undermines the innovation ecosystem by discouraging small entrepreneurs from seizing opportunities to show interesting solutions to potential clients.

What are the key characteristics of an innovative company?

Innovation is a dynamic process. So an innovative company is one that can maximize and leverage the knowledge it generates while also continuously seeking knowledge and opportunities “out there.” Embraer is a benchmark company in terms of managing these two imperatives.

What skills does an innovative workforce have?

You can’t have one individual who can do it all, but you can have a team that brings all the important skills together. You need to have people who can implement
research routines and do tests and laboratory analysis. Then you need people who understand the market and its trends; people who feel the market pulse, who speak to clients regularly. Sometimes, it may be useful for people to venture beyond their comfort zones. For example, you can have researchers who spend one day per week talking to clients. These researchers will bring to the company new problems to solve and ideas to look at. Then they can come up with solutions
too. And you need people who are willing to speak to different interlocutors; people who go to universities, to small companies and even to foreign countries.

What does the leadership of an innovative company look like?

Normally we associate innovation with creative people. But in the case of a company’s leaders, I think we are really talking about obsessive individuals. They have no answers, but they ask questions all the time. And they constantly look for more questions so there will have to be more answers. They don’t tidy things up. On the contrary, they create a mess for others to clean up with new solutions.

Surely companies cannot be “messy” all the time…

Obviously, companies need to have their disorganized moments during the creative phase of the innovation process, but they also need to have order during the implementation phase. Balancing these “yin and yang” dynamics is not easy. If firms are too organized, with everyone following the same standards, they will find it hard to be creative. But if they are very disorganized, they will not make money. Letting a company do both at the same time is a challenge that the leadership has to address.

It is often said that accepting mistakes is also key to innovating.

The current “Weberian” model of organization is based on repetition, learning, standardization and error minimization. It is very efficient in doing this. Innovation requires experimentation and trial and error, so companies have to create opportunities for people to make mistakes. But it is dangerous to accept mistakes.

So how do you strike the right balance?

You must manage risks in innovation. You have to allow mistakes to happen, but you can’t create a culture of mistakes for the sake of being innovative. You have to allow mistakes and create a culture of uncertainty control and risk analysis so that the inevitable mistakes will not undermine the organization.

In what areas would Brazilian firms have a competitive advantage to innovate?

We clearly have, or should have, a competitive advantage in some areas, but this is often badly used. For example, think about the range of innovative technologies,
products and services related to the environment. Given our society’s concerns with sustainability, as well as the fact that the country is home to the largest part of the Amazon rainforest, we should be at the forefront in areas such as cleantech. Instead, we are importing technologies in most areas related to the environment and sustainability from countries such as South Korea, Germany and Sweden. Unfortunately, we still suffer from short-termism, which prevents progress in many areas.

What can we learn from the countries you have cited and other innovative economies?

In terms of the relationships among universities, start-ups and large companies that we have discussed, Israel is a benchmark for us. The US could also be a benchmark, but in it these relations are much more complex than elsewhere because the ecosystem is much more sophisticated, so lessons may be difficult to apply. As far as the role of the state in inducing innovation is concerned, we could look at Israel or Germany. There are also lessons from the US, including individual states such as Massachusetts and California. In these places and others, the state induces innovation through the procurement process. If you look at the federal level in the US, you will see that the Defense Department is a great catalyst for innovation in several sectors. We have to learn from this. In Brazil, we just see the federal state as a source of financing for innovation, but it should go well beyond that.

Professor Arruda, thank you very much. We would like to keep the door open for having an ongoing conversation about innovation-related topics.